The market is underplaying the impact of the Reserve Bank of New Zealand easing mortgage restrictions. This move could make existing interest rates more stimulatory, potentially leading to stronger growth and an upward repricing of rates, providing overlooked support for the Kiwi currency.
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Emerging market central banks' hawkish commentary while cutting rates reinforces market stability. This low volatility, in turn, gives them confidence to continue the cutting cycle. This feedback loop can make low-volatility periods surprisingly persistent, as the actions and outcomes mutually reinforce each other.
Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.
While the idea of US growth re-acceleration is driving dollar strength, it's not the only story. Recent positive surprises in European PMI data and upgraded Chinese GDP forecasts suggest broader global growth resilience. This breadth should help cap the US dollar's rally and may promote weakness against other currencies.
The market's hawkish repricing for the Bank of Canada is likely temporary due to underlying economic slack and trade risks. In contrast, Australia's RBA is a more credible potential hiker, supported by resilient growth and higher inflation, making it a "true soft landing candidate" and a better bet for policy tightening.
Emerging market monetary policy is diverging significantly. Markets now price in rate hikes for low-yielding countries like Colombia, Korea, and Czechia due to stalled disinflation. In contrast, high-yielding markets continue to offer attractive yield compression opportunities, representing the primary focus for investors in the space.
A recent global fixed income sell-off was not triggered by a single U.S. event but by a cascade of disparate actions from central banks and data releases in smaller economies like Australia, New Zealand, and Japan. This decentralized shift is an unusual dynamic for markets, leading to dollar weakness.
J.P. Morgan's 2026 outlook is "Bearish Dollar, Bullish Beta," favoring pro-cyclical and high-yield currencies. They expect the dollar's decline to be smaller and narrower than in 2025 unless US economic data significantly weakens, shifting from the more aggressive bearishness of the previous year.
Even if US inflation remains stubbornly high, the US dollar's potential to appreciate is capped by the Federal Reserve's asymmetric reaction function. The Fed is operating under a risk management framework where it is more inclined to ease on economic weakness than to react hawkishly to firm inflation, limiting terminal rate repricing.
Despite strong export-led growth in Asia, the benefits did not trickle down to households. Weak household income and consumption prompted governments and central banks to implement fiscal support and monetary easing. This disconnect between headline GDP and domestic demand is a critical factor for understanding Asian economic policy.
The disinflationary impact from goods prices has largely run its course in emerging markets. The remaining inflation is concentrated in the service sector, which is sticky and less responsive to monetary policy. This structural shift means the broad rate-cutting cycle is nearing its end, as central banks have limited tools to address services inflation.